Renegotiating Your Business-Farm Loans: Cary Heidesch Nashville, TN Branch Mgr.

A little over a year ago I refinanced my mortgage. I got a great rate and was really happy (and my wife got a new purse as a gift when the refinance was completed— she was happy, too). Now rates have come down more and I’m refinancing again. Why am I refinancing so soon? Because lowering your interest rate is a great and easy way to save money. Anytime we see a discussion on the news about financing, the talking heads’ recommendation is to refinance a home mortgage. But we shouldn’t forget to look at our business loans, especially when the business uses high-cost equipment. Large businesses do this all the time as a long-term strategy. They are constantly talking with banks about their debt and will renegotiate their loans when the time is right. If you’ve purchased a tractor, truck, land, or any other equipment in the last few years, it is time to talk with your lender.

How important is this? A 2% reduction in the interest rate on a 5-year $400,000 loan would result in a $20,000 reduction in interest paid (All numbers are for illustration only). That’s money that can be used to help purchase seed, invest in your retirement account, or anything else you want to do with it.

We also want to keep an eye on our interest expense ratio. This is an important metric to understand the health or our farm. This ratio is simply interest payments divided by the farm’s gross revenue. According to a study from the University of Illinois, an interest expense ratio over 5% produced negative farm income in 2015. No one can survive in the red forever. New loans will only increase risk. The simple math is lowering your interest payments (the numerator in our formula) will lower your interest expense ratio. On a side note, if you are considering a new loan for equipment or land, forecast what your interest expense ratio will be. Also be sure that you model out low commodity prices, mid commodity prices, and high commodity prices. This model will give you a 360 degree understanding of your risk. If your interest ratio is still low during a time when prices are low, you’ll be much more comfortable with the loan. These exercises will keep you from becoming over-leveraged no matter where commodity prices are in any particular year. No tricky analytics are needed for this. The model can be written quickly in excel and is just another tool in your financial-health toolbox.

Farmers are probably the most optimistic business people out there. Let’s face it, what other business person buries their product in the ground, waits to see what the effects of weather will be, and then expects prices will be high enough to make a profit. But farmers can’t control the market. Working with Global Commodity Analytics and Consulting farmers can develop strategies to get the best prices possible. However, you can control your expenses. Taking advantage of low interest rates is a great place to attack your costs. I’m doing it with my mortgage, you should be looking into it for your farm (although buying your wife a new purse after you finish is entirely up to you).

Reach out to us if you have any questions on calculating interest expense ratio or developing a low, mid, high price model.

Zwilling, B. and D. Raab. “Solvency on the Farm.” farmdoc daily (9):176, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 20, 2019.

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